While the entire global investment community is apparently very excited about the US Federal Reserve slowing its rate increases to 25 point increments, there are strong reasons for arguing why another 50 point rate hike, or two, are still on the Fed menu.
It was all about last week’s data of course, and while inflation has mostly slowed, it will not go un-noticed by the Fed that the PCE Core Inflator actually rose last month! Adding fuel to the argumentfor the Fed maintaining its 50 point approach for at least another meeting. GDP slowed, but not as badly as feared, and Durable Goods data leapt higher for the month.
While the market has been celebrating weak economic data as a force to generate slower rate hikes, the data may in fact not have been weak enough?
Chairman Powell has reiterated time and time again that demand needs to be drastically reduced and he is not afraid of economic pain. In fact, quietly, he sees this as the solution. If the run of data is not weak enough, there is no solution, and therefore rates have to continue going higher.
One aspect of the economy the Chairman has repeatedly singled out is employment. Employment must be slowed and weakened. Yet, all employment data released last week suggested an on-going strong environment.
So we have an economy, that in the Fed’s perceptions, is most likely not in trouble, where core inflation actually rose last month, with pipeline price pressures still to come, particularly in services and shelter, and rising global oil prices again threatening US gasoline price re-inflation?
This does not a happy, even complacent Fed make.
Tactically, if they were to reduce rates to 25 points at this meeting, only to have revert to 50 points again later, this would represent a fatal blow to an already tarnished Fed reputation after the ’transitory’ fiasco. Which even we were able to recognise in real time was a disastrous miscalculation.
With underlying price pressures remaining persistent, an economy still going reasonably in Q4, and the continuation of a very strong labor market, the Fed may well ascertain that it is indeed close to
reducing its actions in the fight against inflation, but the job is far from done.
Hence, the big risk to markets this week, is that sentiment has failed to appreciate just how historic a fight this is, and that the Fed must win this fight, even at risk of over-doing it.
Should the Fed hike by 50 points, then risk-off responses would quickly follow. Having enjoyed a lengthy rally, stocks could be badly exposed.
The favoured market view of 25 points is a possibility. Though a much smaller one that people think. Should it occur however, markets will most certainly celebrate this fact. With everyone who wants to be long, now further enthused and leveraged long after mis-reading last week’s tea leaves as all positive, it may yet be a case of ‘buy the rumour, sell the fact”.
On either outcome, there is potential for stocks to correct, or begin to correct by the end of this week.
The steadfast forecast here, is the Fed shows the market who is boss and hikes by 50.
RISK WARNING: Foreign exchange and derivatives trading carry a high level of risk. Before you decide to trade foreign exchange, we encourage you to consider your investment objectives, your risk tolerance and trading experience. It is possible to lose more than your initial investment, so do not invest money you cannot afford to lose。 ACY Securities Pty Ltd (ABN: 80 150 565 781 AFSL: 403863) provides general advice that does not consider your objectives, financial situation or needs. The content of this website must not be construed as personal advice; please seek advice from an independent financial or tax advisor if you have any questions. The FSG and PDS are available upon request or registration. If there is any advice on this site, it is general advice only. ACY Securities Pty Ltd (“ACY AU”) is authorised and regulated by the Australian Securities and Investments Commission (ASIC AFSL:403863). Registered address: Level 18, 799 Pacific Hwy, Chatswood NSW 2067. AFSL is authorised us to provide our services to Australian Residents or Businesses.
Recommended Content
Editors’ Picks
EUR/USD consolidates below 1.0850 amid upbeat mood

EUR/USD is easing below 1.0850 in the early European morning. Traders turn cautious, despite easing banking fears, as the focus shifts toward the euro area inflation data. The pair's pullback could be also attributed to a broad US Dollar rebound.
GBP/USD turns south toward 1.2300 as US Dollar rebounds

GBP/USD is heading back toward 1.2300, fading the Asian bounce in early Europe. Broad-based US Dollar rebound, despite a better market mood and sluggish US Treasury bond yields, is weighing on the pair. US housing data awaited.
Gold declines towards $1960 as USD rebounds ahead of Core PCE Price Index

Gold price is declining towards $1960.00 as investors are getting anxious ahead of US PCE inflation data. The reputation of Gold as a safe-haven amid US banking jitters has ebbed. On a broader note, Gold price is auctioning in a Symmetrical Triangle chart pattern.
Ethereum supply shrinks by 70,000 ETH. Will Ethereum price hit $2,000?

Ethereum transition from Proof-of-Work to Proof-of-Stake was the last major upgrade to the altcoin’s blockchain and the Shanghai hard fork is the next one. The shift to PoS purged 70,000 ETH tokens from the altcoin’s circulating supply.
Market mood improves as banking fears ease

This week, financial markets will focus on key inflation figures from across the globe, speeches by Fed officials, and the US Senate hearings on SVB. Although some normality seems to be returning to markets, this could easily be disrupted by negative news.